Why Watching Europe is Paramount

Last night’s price action in Europe after the announcement of the Cyprus deal was very interesting. After a strong rally in the morning due to the collective sigh of relief that the world didn’t end, the market paused and then headed south at a rate of knots. The banks were the hardest hit, as you would expect.

Soc Gen (Societe Generale) began the morning up 3% and ended the day down 6%. That’s a near 10% turn around on the day.

The catalyst for the selling pressure was a comment by the new Euro group head Jeroen Dijsselbloem in a Reuters interview that the bank restructurings in Cyprus would be a template for future problems elsewhere in Europe.

Yikes. If I had my money in weak banks in Europe’s periphery I would be pulling up stumps quicker than you could say ‘haircuts’.

Damage control became the name of the game as stocks started to plummet and a ‘clarifying’ statement came out a little later saying that in fact Dijsselbloem didn’t mean what he said but that,

‘Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday.

‘Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.’

Stocks managed to bounce on the news that what was said wasn’t said, but let’s face it:

I was also shocked to learn from ZeroHedge that while the people of Cyprus lined up to withdraw a few hundred bucks (at the most due to the restrictions), the London branch and other subsidiaries of the insolvent banks in question were doling out unlimited funds.

A Reuters article states that:

‘No one knows exactly how much money has left Cyprus’ banks, or where it has gone. The two banks at the centre of the crisis – Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus – have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia’s Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks’ largest depositors.’

What this means is that the poor saps that still have money above the €100,000 limit locked up inside these banks will be hung out to dry. Rather than, say, a 40% haircut, they may lose the lot. Ouch. I can imagine there will be some rather angry Cypriots wandering the streets before long, looking for someone to lynch.

It will be interesting to watch what happens once the banks reopen, but the fact is the capital controls that are now in place will frustrate the mass withdrawal of funds that I am sure would have taken place.

The unintended consequences of this deal could be a sharp rise in withdrawals from the weak and overleveraged banks in the periphery of Europe. It just doesn’t make any sense to leave uninsured funds in European banks now. Anyone who loses money from this point in a bank restructuring will only have themselves to blame after this loud and clear warning. Dijsselbloem’s comments just add fuel to the fire.

Last night’s price action in Europe has also set the charts up nicely for a fall in the immediate future.

In the above chart I am comparing the current price action to the topping formation that occurred in early 2011 prior to the steep falls in August 2011.

The blue line tracking the DAX is a 10 day Average True Range (ATR) indicator as a percentage of the price and with the scale inverted on the left hand side. What this indicator shows is the changing levels of short term volatility in the market.

The first thing to note is that many market tops have occurred in the last few years after the ATR indicator has fallen to levels below 1% (Remember the scale is inverted). Also the price action in 2011 shows the market making a new high in May but with increasing levels of volatility. This was a warning that all was not well.

The current price action is looking very similar to the situation in 2011. If prices fall below the high made in 2011 of 7600 (the horizontal blue line), a false breakout will be confirmed and the risk would be firmly to the downside. We would need to see a weekly close below that level to have a high level of conviction and that may still be a month or so away from happening, but the charts are saying that buying the DAX right here is high risk.

The Australian equity market is the weakest of the lot because of news out of China. The news commodities demand may be softening has kicked the stuffing out of our big resource stocks. The banks are still levitating but the fact is if the music stops in the banks we will see some dramatic falls in our market.

I believe a failure below last week’s low of 4928 in the ASX 200 could see a quick fall towards 4700.

I have been saying to anyone who will listen that the false break of the 2010 high of 5025 in the ASX 200 could be the beginning of a sharp correction. I have done a video presentation here outlining how I analyse charts and my reasons for thinking that there will be some great opportunities trading the markets over the next few months. Check it out.

The price action last week was exactly what I needed to see to increase my conviction levels. It was the first week since November last year that we saw a low below the 10 week moving average. A failure this week below that low would confirm the beginning of a correction on the weekly charts.

The only fly in the ointment is the continued strength in US markets. I suspect that there may be some safe haven buying in US markets which is helping to keep them afloat. Keeping a close eye on Europe over the next few weeks is paramount. It won’t take much for the dominoes to start falling.

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~i just heard from my cousin, slewie Rothschild~: banksters are sooo happy those Davos memes got “templated”… new ponies all around… unbelievable! the banksters are looking forward to a diversionary game of pitting the Cypriot Greeks against the Cypriot Turks [both other sovereigns being members of NATO] for “sovereign control”,…while bidding up dressage horses in Europa. kinda like a “neo-Syria”. just send in tons of m.o.n.e.y.[ahem: now, as if by magic, otherwise scarce], plus assorted ETCETERA. arm BOTH sides, and bring the fun bloodbath to Europe? same deal: Russia and China will enforce the “no-fly zone”. or: _______? really. why… Read more »

If the ALP stays in power, and with the deficit revisions the way they are shaping up, poor old Glen is going to lose his diversionary liquidity argument with the BIS world order he is trying to appease ….

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